Startup law blog

A. An EIN is a number assigned to your business by the IRS (similar to what a social security number does for an individual) that is used on tax returns, business licenses, and any forms that require you to fill in an IRS number to specifically identify your business.B. An EIN can be used when you open a business banking account to help separate business and personal expenses.C. All employers with one or more part time or full time employees must have an EIN. If you pay independent contractors for services valued over $600 you must have an EIN as well.D. Anyone who registers as a limited liability company, corporation, partnership, or joint venture must have an EIN.E. If you do not have any employees, you are not required to have an EIN.F. You can apply for an EIN online (or by fax, phone or mail) for free from the IRS at this website: https://sa.www4.irs.gov/modiein/individual/index.jsp. You can begin using your EIN immediately after receiving confirmation.

ONLINE WITH THE APPROPRIATE INFORMATION (ASSUMING YOU QUALIFY) IS THE MOST EXPEDIENT METHOD AND OUR RECOMMENDED METHOD.

​G. Before attempting the online process, to apply for an EIN you need to gather the following information:

The name (actual legal name), address, and entity type of your company (like LLC or corporation);

Decide how you will be taxed: partnership, S corp, C corp, etc.

The formation date of the company;

End of your tax year date (like 12/31 for example);

The name of the responsible party (and SSN!);

The estimated date of the company’s first payroll (if any).

Armed with this information, you can quickly take care of getting an EIN for your company yourself. The IRS has designed the process to be DIY for the average person. Having said that, occasionally there are complicated situations where you should seek counsel.

Carroll Counsel PLLC can apply for an EIN for your company through an SS-4 as part of your incorporation process, or independently, please contact us if you need assistance obtaining an EIN for your company.

Disclaimer: This Blog is made available by Carroll Counsel PLLC for educational purposes only. It is our intent to give you general information and a general understanding of the law, not to provide specific legal advice. Use of this blog does not create an attorney-client relationship between you and Carroll Counsel PLLC. You should not act upon the information on this blog without seeking advice from a lawyer licensed in your own state. Please note that you should not send any confidential information pertaining to potential legal services to Carroll Counsel PLLC or any of its attorneys until you have received written agreement to perform the legal services you requested. Unless you have received such written confirmation, we will not consider any correspondence you send us as confidential. The information on the blog may be changed without notice and is not guaranteed to be complete, correct, or up-to-date. While we try to revise the blog on a regular basis, it may not reflect the most current legal developments. The opinions expressed on this blog are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

1. Do not attempt to avoid legal fees by preparing your own contracts. Often times, when businesses and startups do this, it leads to costly and time-consuming mistakes that could have been avoided by simply hiring an attorney to prepare the documents. Contracts must be narrowly tailored to the particular transaction at hand. Although there are many templates easily available online that may appear to suit your needs, such templates typically require extensive modification from client to client. A qualified legal professional will have the expertise to quickly spot which provisions need editing and can prepare your agreement accordingly.

2. Seek legal assistance as early as possible in the transaction. Attorneys can assist throughout the entire contractual process including drafting letters of intent, negotiations with the other side, and more. Do not wait until after the contract is signed to hire counsel.

3. Always have an exit strategy. Many startups or businesses entering into partnerships or joint ventures with one another fail to consider the possibility that the business may not work out as planned. Additionally, a founder may have to leave the company due to unforeseen circumstances. In such scenarios, it is important to specify the method for company dissolution, transfer/buyout of shares and repayment of debts and capital contributions.

4. Articulate a dispute resolution process. People typically avoid this discussion as it can be awkward and uncomfortable. However, it is essential to outline how disputes are to be handled, should they arise. This will save you considerable time and money in the long-run. It is also important to specify where dispute resolution should take place, especially for those engaging in multi-state operations. Do not wait until after something goes wrong to consider this.

5. Hire your own attorney. Each business or startup involved in a transaction should hire their own attorney. While attorneys may represent parties on both sides of a transaction (with the written consent of both parties), it is best to hire your own attorney. That way, you can be assured that somebody is looking out for your interests alone. In cases when attorneys jointly represent both clients, they have to remain unbiased in the event of disputes.

6. Consistently define terms and phrases used throughout the contract. It is important to maintain consistency throughout the agreement at all times. For example, if the term “purchase price” is defined as $15,000 in one section of the document but as $10,000 in another section, this will result in ambiguity and confusion. The validity of the entire agreement may be called into question.

7. Be specific. Spend some time meticulously going through all of the key details involved in the transaction. Avoid using vague descriptions as much as possible, especially when money is involved. Although certain details may appear to be common sense, that may not be the case 2-3 years down the road. This can lead to disputes between the parties. In such instances, a third party such as a judge or mediator may have to get involved in order to determine the true intent of the parties. Take the time to flesh out all of the details so that all of the parties will be better off in the long run.

8. Outline the rights and responsibilities of each party. In any contract, it is essential to articulate, as specifically as possible, the obligations of each business. Prior to commencing business, each person should have a clear understanding of what is expected of them. It is important to memorialize each party’s rights and responsibilities in writing, in the contract itself – even if this has been previously agreed upon orally or via email. This will help to prevent disputes and disagreements between the companies.

Disclaimer: This blog is made available by Carroll Counsel PLLC for educational purposes only. It is our intent to give you general information and a general understanding of the law, not to provide specific legal advice. Use of this blog does not create an attorney-client relationship between you and Carroll Counsel PLLC. You should not act upon the information on this blog without seeking advice from a lawyer licensed in your own state. Please note that you should not send any confidential information pertaining to potential legal services to Carroll Counsel PLLC or any of its attorneys until you have received written agreement to perform the legal services you requested. Unless you have received such written confirmation, we will not consider any correspondence you send us as confidential. The information on the blog may be changed without notice and is not guaranteed to be complete, correct, or up-to-date. While we try to revise the blog on a regular basis, it may not reflect the most current legal developments. The opinions expressed on this blog are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

​Whether you are an employee, advisor, officer, or founder of a startup, you will likely encounter some form of stock options or restricted stock. Having a working knowledge of the basic terminology surrounding the issuance of shares in a corporation will prove essential in understanding (and negotiating) the terms of your own status as a shareholder.

Upon formation, corporations authorize to issue a specified number of shares. These are the “authorized” shares from which corporations can issue shares to investors, employees and partners. Generally, shares are considered “issued” when the corporation has entered into an agreement with a shareholder to purchase or earn the shares. Shares may be issued from time to time, at the corporation’s discretion – meaning that they do not necessarily have to be issued all at once.

“Options” refer to a right to purchase shares in the future. Typically, options are issued pursuant to the corporation’s equity compensation plan. A corporation may grant options to various individuals and/or entities for a specific number of shares. This number cannot exceed the total number of shares that the corporation is authorized to issue and typically cannot exceed the number reserved specifically for the equity compensation plan (the “Equity Reserve”). The individual and/or entity can exercise their option to purchase the shares in the future. Until the option is exercised, these shares are not counted as “issued” shares.

“Warrants” are similar to options in that they refer to the right to purchase the corporation’s stock at a specific price, by a specified date. Warrants are typically used by corporations to entice investors into purchasing shares or making other financial commitments.

“Outstanding” shares are the number of shares that have been issued by a corporation. The number of outstanding shares cannot exceed the number of shares that the corporation is authorized to issue. “Outstanding” does not count options or warrants that have not been exercised.

“Fully Diluted” shares refer to the total number of shares of a corporation that are issued and outstanding as well as the number of shares reserved for issuance upon the exercise of Options or Warrants.

When assessing the percentage of ownership of a corporation for purposes of negotiation or compensation, it is important to understand the difference between Outstanding and Fully Diluted shares and whether the promised percentage is a portion of the Outstanding shares or the Fully Diluted shares.

For further information on this topic, please stay tuned as we continue to update our blog!

*** We are only covering an 83(b) Election in the context of founder issuance or issuance of stock (or early exercise of stock options) subject to an equity incentive plan – this is NOT tax advice – you should seek advice from your own tax advisors***

“Do I need to file an 83(b) election?” is one of the most frequent questions we receive when issuing founder stock or equity under equity incentive plans. Filing an 83(b) election, if appropriate, could have major tax implications.

Section 83(b)Founders or early employees typically make Section 83(b) elections on stock purchases subject to vesting. If you’re reading this post and have a fully vested stock (or thinking of exercising your vested stock options), you can stop now. The question of whether you make an 83(b) election or not does not apply to you because your stock is likely not subject to a substantial risk of forfeiture.

Section 83(b) of the Internal Revenue Code requires the founder or employee to recognize income when the stock ceases to be subject to a substantial risk of forfeiture (read “vests” for most purposes)*. But if the founder or employee makes a Section 83(b) election, he or she will recognize the income as of the purchase date of the stock. In most situations of an early stage company, if an 83(b) election is made, there is no income realized or recognized because the purchase price for the stock and the fair market value are the same (hence no income from a difference in purchase price and fair market value).

Why does this matter? Imagine a scenario where the stock is subject to vesting over four years. Let us say that the stock is work $0.001 per share at the time of original issuance. Let us say further that in year 4, the last year in which vesting ceases, the stock is worth $1.25 per share. Instead of recognizing no income because you paid for your stock when you bought it in year 1, you recognize income at $1.25 per share. Additionally, if you sell your company in year 5, you may be subject to ordinary income tax rates instead of long term capital tax rates.

This is not meant to serve as tax advice – you need to consult your personal tax advisor on whether you WANT to file an 83(b) election. Here we just strive to answer the question – do I need to consider making one or not?​*There can be other conditions on a stock that make it likely to be considered under a substantial risk of forfeiture. For most purposes in the start-up context, that means just forfeiture at original price or very low price.

83(b) Essentials

An 83(b) election must be filed with the IRS within 30 days after the purchase date. There are no exceptions to this rule. If you miss the deadline, you miss the opportunity to make the election.

The election should be filed by mailing a cover letter and two (2) copies of the signed election form by certified mail, return receipt requested, with a self-addressed stamped return envelope to the IRS Service Center where the individual files his or her tax returns.

The individual should retain one copy of the election to submit with his or her tax return and an additional copy should be given to the company.

If you live in a state where state income taxes and returns must be paid and file, you should look to see if a copy needs to be included with that state filing.

​One of the most important decisions you can make in your company’s life cycle is your choice of entity. Think about it in this light: you have a child preparing to choose a college. Princeton and Harvard are both great options, but each comes with their advantages and disadvantages. Either way your child will come out educated and successful, but the college you choose will largely dictate their path and opportunities in life. In start-up land, your company is your “child,” Princeton is an LLC, and Harvard is a C-Corp. Where you want your company to end up in the next quarter, next year, and next five years matters in choosing your entity structure.

​C CorpsC Corps (corporations taxed under Chapter C of the Internal Revenue Code or your standard “Inc.”) are by far the most common choice of entity when forming a tech startup company that will seek venture financing in the near term. First, most investors prefer C Corps because (1) they are familiar with the structure, (2) C Corp structures are fairly rigid, and (3) they can have separate classes of stock to create different preferences and share valuations. C Corps can also offer incentive stock option plans in a fairly straightforward, easy to administer way to attract key employees. On the downside, C Corps are subject to double taxation. Meaning they are taxed once at the corporate level as a separate entity, and again with the stockholders based on dividends or distributions*. To offset this, VCs point out that most startups are not in the business to declare dividends, but rather, the early shareholders plan to exit through a sale of the company or IPO someday. Additionally, a C Corp shareholders may take advantage of Section 1202 of the Internal Revenue Code pertaining to the exclusion of certain capital gains if certain conditions are met.

LLCsLLCs (or Limited Liability Company) are ideal for startups that plan to bootstrap or be financed by a small number of investors, but are not ideal for venture capital investing or multiple rounds of investments. Typically, an LLC’s taxable income is passed through to the individual members meaning that the LLCs earnings are only taxed once, at the member level. LLCs are extremely flexible when it comes to management or ownership structures, managed more informally, and are not held to the same corporate formalities as C Corps. This same flexibility can be seen as a hindrance to some investors, so some will not invest in this type of entity structure. LLCs can still offer employees incentive membership interests in the LLC, but they are unable to offer incentive stock options to employees like the C Corp can and administration of such plans can be more burdensome.

Our Two CentsIn sum, if you are planning to begin a financing round or know that you will be seeking venture financing when forming the company in the next 12 -18 months, you may want to be a C Corp from the start. Conversely, if you will be bootstrapping your startup or receiving funds from a small number of investors, an LLC may be your better choice.

*unless your company qualifies as a Qualified Small Business and the stock is Qualified Small Business Stock under Section 1202 of the Internal Revenue Code. Blog post on this coming soon.

We would love to speak more with you about your specific startup in order to give you the most prudent advice. Please visit our Contact page with any questions about what entity structure would be best for your startup.

Disclaimer: This Blog is made available by Carroll Counsel PLLC for educational purposes only. It is our intent to give you general information and a general understanding of the law, not to provide specific legal advice. Use of this blog does not create an attorney-client relationship between you and Carroll Counsel PLLC. You should not act upon the information on this blog without seeking advice from a lawyer licensed in your own state. Please note that you should not send any confidential information pertaining to potential legal services to Carroll Counsel PLLC or any of its attorneys until you have received written agreement to perform the legal services you requested. Unless you have received such written confirmation, we will not consider any correspondence you send us as confidential. The information on the blog may be changed without notice and is not guaranteed to be complete, correct, or up-to-date. While we try to revise the blog on a regular basis, it may not reflect the most current legal developments. The opinions expressed on this blog are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.